Quote of the Week

"All of this reads as if yanked from an Ayn Rand novel. The government, in a desperate attempt to avoid political pain caused by its own foolish economic mistakes and lax oversight, has poured billions into bankrupt companies. Then when those companies pass out bonuses they claim are necessary to retain qualified workers, the political firestorm leads government officials to propose tax rates that would make even British socialists of a half century ago blush. We are slipping into debates that have nothing to do with a free economy and everything to do with the government calibrating how to balance the favors it hands out with the inevitable moral outrage those favors engender." --Wall Street Journal columnist John Fund

Omaba is having an effect

As 2009 opened, three weeks before Barack Obama took office, the Dow Jones Industrial Average closed at 9034 on January 2, its highest level since the autumn panic. [Monday] the Dow fell another 4.24% to 6763, for an overall decline of 25% in two months and to its lowest level since 1997. The dismaying message here is that President Obama's policies have become part of the economy's problem. ...[O]ne negative revelation has been the way he has chosen to spend his scarce resources on income transfers rather than growth promotion. Most of his 'stimulus' spending was devoted to social programs, rather than public works, and nearly all of the tax cuts were devoted to income maintenance rather than to improving incentives to work or invest. His Treasury has been making a similar mistake with its financial bailout plans. The banking system needs to work through its losses, and one necessary use of public capital is to assist in burning down those bad assets as fast as possible. Yet most of Team Obama's ministrations so far have gone toward triage and life support, rather than repair and recovery. ... The market has notably plunged since Mr. Obama introduced his budget last week, and that should be no surprise. The document was a declaration of hostility toward capitalists across the economy. Health-care stocks have dived on fears of new government mandates and price controls. Private lenders to students have been told they're no longer wanted. Anyone who uses carbon energy has been warned to expect a huge tax increase from cap and trade. And every risk-taker and investor now knows that another tax increase will slam the economy in 2011, unless Mr. Obama lets Speaker Nancy Pelosi impose one even earlier. Meanwhile, Congress demands more bank lending even as it assails lenders and threatens to let judges rewrite mortgage contracts. The powers in Congress -- unrebuked by Mr. Obama -- are ridiculing and punishing the very capitalists who are essential to a sustainable recovery. The result has been a capital strike, and the return of the fear from last year that we could face a far deeper downturn. This is no way to nurture a wounded economy back to health." --The Wall Street Journal

The Speed of Trust

Trust is pretty well gone, done and over with, as a result, the economic system is slowing down, and slowing down fast.



*******************
By Adrienne Toghraie

Most are familiar with Stephen Covey’s now classic book, The Seven Habits of Highly Effective People. In that book, Covey wrote about his son, also named Stephen Covey, who has written a wonderful and equally important book, The Speed of Trust. In this book, the younger Covey discusses the fact that trust is essentially the lubricant that moves individuals, organizations and societies forward. Without it, everything slows down:

If I cannot believe what you say, I will need to take the time to verify it.
When everyone along the line has to verify, the machinery grinds to a halt.
This is what is happening now in the US economy. One after another, the people and institutions we trust to manage our money by employing the principles of honesty, integrity, and strict fiduciary guidelines established by law, the Bernie Madoffs who exemplified those qualities, have sidestepped those principles in the name of pride, greed, and expediency. The entire system of credit ultimately depends upon trust; and without trust, the system has crumbled.

But, the problem has gone deeper than merely our financial institutions. A growing cadre of the elected officials we entrusted with the responsibility to lead us, to make our laws and ensure their enforcement, to use our tax money to protect and support us and to protect our constitution and its implementation, have broken that trust. They have been caught hiding bribe money in the refrigerator, selling congressional positions to the highest bidder, and just about every nefarious and illegal act imaginable.

We have even learned to distrust the source of our food supply. Foodstuff from foreign sources that do not adhere to our safety requirements has infiltrated our system. Lethal E-coli bacteria and salmonella infected countless citizens. Shortcuts taken in the raising, production, and processing of our food have led to the contamination of our basic necessities of life.

People have started looking around and asking themselves, “Whom can we trust?”
What does all of this have to do with making money in the markets? The gears that drive a investment are greased with trust.

What about those annual reports? On the basis of the financial statements made by a company’s top executives and signed off by their lawyers and accountants will determine the investment decisions made by investors who do not have the resources to personally investigate the financial condition of each and every company on the exchange. Regardless of how deep or shallow the pockets are of those who are making investment and trading decisions, lives will be seriously and adversely affected if the accounting firm that signs off on the audit is being paid generously to cook the books. When you discover the ruse, you lose trust. You are then forced to stop and reconsider your entire investing strategy.

Suppose you discover that the single most important source of information about the markets can no longer be trusted, what do you do? Where do you go for the information vital to your decision-making? For many loyal readers, their major city newspaper’s imprimatur on a story was the very guarantee of authenticity. Then, in recent times, stories began to circulate about the lack of fact-checking and editorial rigor and of political and personal bias that colored reporting and pushed politically embarrassing stories to the back of the paper or simply off the radar. The result has been a decline in readership due, in part, to a lack of trust. In the news business, trust is the coin of the realm. One major newspaper in the US that is not experiencing a decline in readership is the most trusted source for business news, The Wall Street Journal (and no, this is not an advertisement for TWSJ). But, just suppose that you could no longer depend upon it?

The speed of trust goes all the way down to the people who clean your offices at night. If you cannot trust them not to go through your files, hack into your computer or steal the money in your desk drawer, you will be forced to clean your own offices after work hours.

As we watch in amazement at how rapidly the speed of trust is slowing down, we ask ourselves if there is a way back out of this mess. The answer is yes. It starts with each of us showing the people around us that our word is unimpeachable, that we are willing to do what we promise to do, that we are following the rules (our own rules as well) and that we can be trusted. Then, we can rightfully demand the same from those upon whom we depend. Reagan said it well so long ago: trust but verify.

Each and every one of us is hurt by the broken trust of one of our colleagues. Our profession is smeared with the same brush. We can, however, restart the speed of trust by raising the bar, by expecting and demanding more trustworthiness, and by verifying that we are getting it. If we do not do this, if we simply wring our hands in dismay, we will not be able to get the machinery back up and running. And we must do this across the board. We need to hold our elected officials accountable and let them know that government by the wink-wink-nod-nod process of governance is not acceptable and we will not allow the game to be played by those rules. The trillions of dollars being borrowed from our children and grandchildren to “jump start” the economy cannot be distributed like a shell game or we will all be the losers as trust further erodes and, instead of being jump started, the economy will lay down and slip into unconsciousness.